Daily Agenda: Risk Assets Rally on Brexit Polls

Stocks, sterling surge on strength in Remain camp; China new home prices rise; India central banker Rajan to step down.


Fresh poll data that suggests the Remain camp in the Brexit debate is gaining momentum sparked a rally in the pound sterling versus primary global currencies and fueled a surge in international equities this morning. With the vote scheduled for this Thursday, Prime Minister David Cameron has stepped up efforts to convince the U.K. that a future within the European Union is brighter than one apart. The swing in sentiment came after a moratorium on campaigning that began after the murder of pro-EU Labour member of parliament Jo Cox. Gold, which has rallied sharply in recent weeks in the run-up to the referendum, fell by almost 1.5 percent in early spot trading in London, signaling that investors have paused in their flight to safety.

New home prices continue to rise sharply in China. Housing price data released by China’s National Bureau of Statistics on Saturday revealed a tenth consecutive rise in Chinese new home values in May. The headline 35-city index rose by 1.5 percent for the month and 13.3 percent year-over-year. While the pace of price growth in Shenzhen moderated slightly, it remained over 50 percent year-over-year.

RBI head Rajan to leave post. Reserve Bank of India Governor Raghuram Rajan surprised markets with his announcement over the weekend that he will not seek a second term at the helm of the central bank to take up an academic post. Rajan has proven to be popular with investors after RBI policy tamed runaway consumer inflation and stabilized the rupee.

Japanese exports weaker than expected. Ministry of Finance trade data released today indicated a steeper than expected decline in outgoing shipments for May with exports down by 11.3 percent versus the same month in 2015. Imports, at a 13.8 percent year-over-year contraction, were stronger than April levels. Critically, the sharp drop in exports was driven in large part by a nearly 15 percent annualized decline in orders bound for China.

Portfolio Perspective: How will Brexit Play Out? — Sean Darby, Jefferies

We continue to think that the U.K. will vote to Remain in the European Union on Thursday, and we expect that the pattern will follow the Scottish referendum in September 2014, where the polls were close leading into the vote, but on election day produced a 55-to-45 result.


The result of the referendum should be known sometime on Friday, perhaps around 4 a.m. U.K. time, but the results will trickle in council by council as votes are counted and reported individually. There will not be an official exit poll because there is simply no data on how individual constituencies voted the last time around and what sort of a swing there was on the day. Therefore, whatever unofficial/private exit polls there might be should be treated with caution: They lack any historical data to go on when trying to draw a conclusion from a small survey of voters.

What happens to the markets if the U.K. votes to leave? It is assumed that sterling takes the initial brunt of adjustment and the other markets follow. But much depends on what the polls are saying the night before the referendum — that is, how much of a surprise we get on the dayand how much the markets had already adjusted.

What is the impact on the U.K.? The adjustment for both the U.K. and the euro zone economies, in case of a significant, shock would be managed via a depreciating currency. Both currencies could weaken significantly against the U.S. dollar, although not necessarily against each other. The basic rules of thumb for both regions are that 10 percent depreciation in the trade-weighted exchange rate could help push inflation up by about 0.3 percent and gross domestic product up by around 0.5 percent.

Sean Darby is chief global equity strategist at Jefferies in Hong Kong.